Redrawing Egypt’s Energy Map

CAIRO - 17 October 2017: After suffering a spate of shortages in domestic energy supply following declined investment inflows and heightened political unrest just a few years ago, Egypt sighed a collective sigh after several recent gas finds, including the gigantic “Zohr” discovery. With the major finds in the Mediterranean Sea and North Delta, Egypt currently has plans to export natural gas in 2020 and further invest in cleaner energy.

The electricity market in Egypt has traditionally been dominated by state-owned companies; however, the coming five years might see a change in the power map, with many private investors tapping into the sector through renewable energy.

The government has adopted policies aiming to liberalize electricity prices and achieve a balance by 2019 through gradually phasing out subsidies, allocating mandatory quotas for consumers to purchase electricity from renewables projects, and engaging the private sector to implement 67 percent of total renewable energy projects under identified mechanisms.

Utilized to meet energy demand levels, natural gas and fossil fuel are primary fuels accounting for 94 percent of energy consumption in 2015. But diversifying the energy mix remained a priority for Egypt, with an ambitious plan to produce 20 percent of its energy from renewables by 2020.

Last year, the renewables sector was hit with challenges, pushing some companies to back out of mega projects in Egypt. However, the sector has re-attracted investments as new legislatives were enacted to overcome these challenges.

Egypt becoming an energy hub

Egypt seeks to become a regional and global hub for energy generation, transmission and distribution to Europe, President Abdel Fattah al-Sisi stated during the German-Egyptian Economic Forum in Berlin last June. Along with Cyprus and Greece, Egypt has formed a tripartite partnership, pushing ahead to not only meet domestic demands, but also that of the European market.

One of the forms of this partnership is an energy sharing system proposed through the construction of the EuroAfrica Interconnector, a 1.648 km underwater electric cable connecting national power grids of Egypt, Cyprus and Greece with a capacity of 2,000 megawatts. The project is in the study phase.

Amr Serag Eldin, a professor at the Department of Petroleum and Energy Engineering at the American University in Cairo, discussed with Business Today Egypt the advantages of such connections, explaining that it “shares diversified energy resources . . . reduces [the] margin of inefficient spinning reserves and reduces peak loads due to differing time zones.”

Nicholas Papadopoulos, a Cypriot presidential candidate, told Business Today Egypt that, “Egypt is our best partner and an energy player. . . . We must promote mutual cooperation on natural gas . . .because it is essential for us as Egypt has the potentials to become an energy hub in the region.”

Papadopoulos, who is the President of the Democratic Party in Cyprus, said that if he were to win the elections scheduled for February 2018, one of the first things his government would embark on would be “to find ways to conclude commercial agreements with Egypt for the natural gas trade.”

Tessa Terpstra, the Netherland’s MENA Regional Envoy for Water and Energy Security, is confident about potential cooperation and the future of the renewable energy sector in Egypt.

“Egypt clearly has huge potential for renewable energy, with its high number of sunny days, vast open spaces in the desert, plenty of wind and biomass . . . [and] the brainpower and innovative start-ups to make renewable energy happen,” said Terpstra at the end of last month on the heels of a Dutch Foreign Ministry delegation arriving in Egypt to discuss cooperation opportunities in renewable energy.

Tessa Terpstra, the Netherland’s MENA Regional Envoy for Water and Energy, Photo Courtesy of Terpstra

Terpstra explained that both countries are taking similar paths to adopt a difficult transition to a more sustainable energy mix, and that Egypt has a good energy efficiency plan, which the Netherlands “would like to help implement.”

She further noted that the Netherlands is still figuring out which type of renewable energy its expertise could serve, as its energy partnership with Egypt is just starting. However, she mentioned that her country is keen on helping start-ups as well as small and medium-sized enterprises to develop their potential.

Investing in natural resources

Blessed with sun for up to eight or nine hours a day and speedy winds, Egypt’s climate makes it a perfect destination for renewable energy development, and private companies are currently looking to invest in its natural resources.

“Investing in renewable energy in Egypt has big opportunities, especially as the investment value needed to fund renewable energy projects is going down,” Mohamed el-Sobky, former head of the New and Renewable Energy Authority (NREA), told Business Today Egypt. Sobky outlined the government’s steps to solve standoffs that prompted multinational lenders to pull out of renewable energy projects.

One of these steps is allowing international arbitration in contracts, governed by the rules of the Cairo Regional Centre for International Commercial Arbitration (CRCICA), with Paris hosting the offshore arbitration, Sobky continued.

Solar photo voltaic panels - Reuters

The decision has brought back companies such as the International Finance Corporation (IFC), a member of the World Bank Group, which approved in July investments worth $635 million to help construct, operate and maintain up to 11 solar power plants in Aswan in Upper Egypt.

Sobky also highlighted facilitations provided for developers in terms of converting to foreign currency and exchange rate. “At the beginning, we were encouraging investments in renewables, but laws were not clear at that time, pushing some [investors] to withdraw their investments last year,” Sobky said. “But now, the legislative framework is unclouded and has been reviewed by international finance bodies. . . . Egypt will always keep the door open for those who withdrew to return to the market.”

New electricity generation

As of 2014, Egypt has been looking to substantially diversify its energy projects. The mix includes gas-fired and coal-fired projects, alongside a number of solar and wind projects under the build, own, operate model.

The government introduced a Feed-in-Tariff (FiT) program and is in talks to move ahead with the 4.8 gigawatt nuclear power plant at Dabaa. One study has foreseen contribution of renewable energy to the energy mix by the year 2022.

Interestingly, around 12 percent (the highest share) of electricity generated of renewable energy will come from new wind farms planned and constructed across the country. Almost half of Egypt’s proposed target of installing an additional 4.3 gigawatts will be achieved through wind turbines.

Big multinational companies signed power projects worth billions of dollars, including Siemens, which inked a contract for a mega project including 12 wind farms in Egypt with approximately 600 wind turbines and an installed capacity of 2 gigawatts.

Wind Farms - Reuters

However, wind energy projects have not managed to attract as many investors as have solar energy ventures. International companies reportedly cited less generous tariffs for buying output power being offered to wind ($0.04/kWh for 5,000 hours or maximum) compared to those offered to solar ($0.84 /kWh), inviting companies to invest in the latter.

“The FiT scheme has two main problems when applied to wind power investments,” Ziad Amr el-Arousy, the managing director of an agent company for the Spanish manufacturing company Gamesa in Egypt, told Business Today.

“First is its low tariff set for buying output power, and second is that part of the payment (40 percent) will be paid in Egyptian pounds at L.E. 8.88 and (60 percent) pegged to the USD,”.

Gamesa has been operating in Egypt since 2003, installing hundreds of megawatts of turbine capacity in the country. It has completed a number of wind projects in the Red Sea governorate: four wind projects in Zaafarana, a 200 megawatt project in Gabal el-Zeit area with a 40 megawatt ongoing extension, in addition to a 200 megawatt project currently underway in the Suez Gulf area.

Time for privatization

El-Arousy urged for more official attention to wind power, saying, “The FiT scheme is serving solar investments, while the future of wind power projects will be almost under the build, own, operate model.”

According to El-Arousy, the model does not oblige developers to pay a percentage of the payment in Egyptian pounds. He further explained that such a model would be a win-win format for both developers and the government as competitors will increase, providing the government with the best tariff pricing.

Sobky agrees. He calls for increased facilitations to investors interested in injecting funds into wind projects, like connecting output power to the national grid and putting into force legislation allowing investors to sell output power to consumers through the grid.

Identifying the best place to invest in each type of renewable energy source is very important, said Sobky, adding that the Suez Gulf, Red Sea and West and East Nile areas are where wind speeds hit high records.